About Estimating

Cost Modelling for Underground Mining Cost Estimates

Accurate estimation of underground mining costs is an essential part of any scoping or feasibility study. It is also an essential part of any underground contractor’s business if they are to be successful in winning tenders and want to return a profit on the project.

First principles estimating is considered as being the “best practice” method for estimating these underground mining costs. This is the process of building up the costs for a mining activity by considering all the requirements and components that are needed to undertake the activity. It is about having accurate knowledge of the direct costs of your resources – plant, labour, materials and subcontractors and an in-depth knowledge of underground development and production processes. These all contribute significantly to the calculation of accurate estimates.

First principles estimating is undertaken by developing spreadsheets or the use of a database programme to model these processes and incorporate the various labour, plant, materials and consumable costs that are expected to be expended.

Ideally, the models are put together by experienced mining engineers whom have spent considerable time on mine sites or time spent with an underground mining contractor in a project engineer or management role. This is because contractors focus on the cost and productivity side of mining.

The cost estimate model is generally based on a mining schedule of underground activities such as ore and waste development, ground support, production and haulage and generates an output of the total mining cost to undertake these underground activities. The model is applicable for both mine owner estimates for feasibility studies or calculations for contractor tender submissions. The output from the model can be presented in a fixed and variable format, a schedule of rates format or in a cashflow style format. The format used will depend on the purpose of the cost estimate or for the first two formats, the pricing schedule requirements of a tender document or a shadow estimate.

The fixed and variable output format separates the costs into two parts. The first part is the variable cost for each mining activity as a rate per metre, tonne, tkm or other appropriate unit. The second part is the projects fixed and overhead costs as a rate per month. By separating out these two parts, this alleviates the requirement to spread the fixed and overhead costs over the variable mining activities (tonnes, metres, ground support etc) which would result in a range of unit mining costs for each mining activity dependent upon the estimators spreading allocations (ie what percentage of the fixed cost is allocated to each mining activity).

The schedule of rates output format reports the costs as the fixed and variable costs added together to obtain a single total cost for the mining activity. This requires spreading all the fixed and overhead costs over the items to be costed in the output format and converting to a cost per metre, tonne, tkm or other appropriate unit. However, this can result in different unit costs for a mining activity because of the estimators spreading allocations (ie what percentage of fixed cost is allocated to each mining activity), and if assessing contractor tender submissions can make it difficult to compare.

The cashflow output format reports the mining costs on a month by month basis as expense categories as opposed to a cost per mining activity. This format is useful for budgeting purposes and can also be used in conjunction with the other two formats.

A good cost model should be able to switch between all three output formats with each format generating the same total all up mining cost for the mining schedule.

First Principles Cost Estimation

Best practice estimating for underground mining costs is first principles estimating. First principles is the process of building up the costs for a mining activity considering all the parts and activities needed to put it together. It is about having accurate knowledge of the direct costs of your resources – plant, labour, materials and subcontractors.

With first principles estimating of underground mining costs, an in-depth knowledge of underground mining development and production processes contribute significantly to the calculation of accurate estimates. It is within the following sections that the basis for first principles cost estimation of underground mining enables an estimate of reasonable rates and prices to be generated when compiling an underground mining cost estimate or a contractor developing tender prices.

Cost Estimate Output Number Formats

The output of the total underground mining costs for a mining schedule can be presented as a fixed and variable format, a schedule of rates format or as a monthly cashflow.

The format used will depend on the purpose of the cost estimate. The first two formats would be applicable for shadow estimates. The cashflow format will give the costs monthly for budgeting or feasibility purposes.

A fixed and variable style costing format separates out the fixed and overhead costs in the output numbers. This alleviates the requirement to spread the fixed and overhead costs over the variable mining activities (tonnes, metres, ground support etc) which would result in a range of unit mining costs dependent upon the estimators spreading allocations (ie what percentage of fixed cost is allocated to each activity).

A schedule of rates style costing format spreads and adds the fixed and overhead costs to the variable mining costs. The output numbers can result in different unit mining costs as a result of the estimators spreading allocations (ie what percentage of fixed cost is allocated to each activity).

A cashflow style costing format shows the mining costs and expenses on a month by month basis in accordance with the mining schedule. This output format is useful for budgeting purposes as it can include a breakdown of cost centres and when the costs occur in time.

Impact of the Mining Schedule (or Physicals) on Cost

For the mining cost estimator, the mining schedule is considered an important aspect in the cost estimation process. It is the quantity of the monthly physical units (metres, tonnes, bolts etc) that are of importance from a costing point of view as this drives the number of resources in the estimate.

These physical mining quantities generated from the mining schedule determine the number of plant, equipment and labour requirements on a monthly basis that are required to complete the underground works. The costs of these resources are calculated on a monthly basis in accordance with the mining schedule. Calculating on a monthly basis takes into account the cost of resource peaks and troughs as the mining schedule changes over time.

The mining physicals are the actual quantities of all the mining activities and operations that make up the mining schedule. It is these items that all the costs of the project would be allocated to or spread over to estimate the total underground mining cost of the schedule. The cost of individual physical activities generates a schedule of rates suitable for tendering/comparison purposes.

The achievement of the budgeted mining physicals determines the real unit cost for each activity. For example, the biggest costs are mostly labour and capital which in an owner operator scenario are generally fixed costs. Should the scheduled physicals not be reached then the real unit costs per metre, tonne or tkm will increase due to the reduced productivity from the resources used. This unit cost could also be read to mean $ per tonne mined.

The budgeted physicals can fall short due to deteriorating ground conditions, excessive water inflows, unskilled labour and unreliable plant if all these aspects have not been taken into account when generating the mining schedule.  The schedule may also not be generated from persons intimately connected with actual site conditions including ground types and labour skills. A shortfall results in the schedule being extended. The total mining cost to undertake the mining schedule will increase in accordance with the extra time to complete, as more fixed and overhead costs are expended in achieving the same physical quantities. The variable costs will stay the same but expended over the longer time period.

When estimating the cost for any underground mining activity (for example development, production drilling and blasting, stope bogging or haulage), the cost components of labour, plant, materials, subcontractors and overheads (both onsite and offsite) need to be considered. These costs are then equated as a cost per unit of measure for the activity (metres, drill metres, tonnes, tkm etc) and all added together.

The mining cost estimate should reflect all the tasks required to perform the physical mining activities making up the mining schedule. The cost of each individual task (eg drilling, charging, bogging etc) will be the estimation of all the materials and resources that make up the various components required to undertake that task.

In a schedule of rates format, as the fixed and overhead costs of labour and plant are spread over the items to be costed, this can result in a range of unit costs varying greatly as to which schedule of rates items and at what percentage the cost estimator or contractor decides to allocate the overhead cost. So if the total number of tonnes, drill metres and other units are performed over the costing period of the project without adding any extra resources, then the costs are recovered. If more quantities are performed for the same amount of resources, then additional costs are recovered without any expense. Conversely if less quantities are performed then not enough costs are recovered to cover the expense.

Cost Estimate Components

When estimating the cost for any underground work activity of the mining schedule (for example development, production drilling and blasting, stope bogging or haulage), the values of five cost elements need to be considered which make up the cost of the activity namely:

1. Cost of materials and consumables required for the activity;

2. Cost of direct labour resources required to undertake the activity;

3. Cost of direct plant and equipment resources required to undertake the activity;

4. Cost of onsite overheads, being those items/costs of labour, plant and materials that cannot be directly related to the mining activity being estimated but are nevertheless needed;

5. Cost of any subcontractors required; and

6. Cost of offsite or corporate overheads, being a contribution to those costs required to support the mining activity that is not directly related to the mining activity (for example head office administration, payroll, HR costs). These offsite or corporate overheads are generally more applicable to contractors as these costs need to be included and recovered from the activities performed.

Materials and Consumables Cost

Materials and consumables are items which get “used up” or discarded when undertaking the mining activity for example, explosives, ground support items, fuel, jumbo drill bits rods and shanks. The cost of these materials and consumables needs to also include a component for wastage and freight to site. Materials will be treated as a direct cost to an activity or an overhead cost to be spread over different activities.

Obtaining the cost of materials and consumables is relatively straight forward – it is what the purchaser pays the supplier for the goods and can be obtained from quotes or invoices. The quantity of materials and consumables required will depend on the amount of the mining activity that is the subject of the costing and is directly allocated to the mining activity. The blast patterns, or number of holes drilled per face determines the number of drill metres which in turn determines the explosive and drill consumables cost. From this, the explosive cost per charge metre as well as drill consumables cost is calculated.

Drill Metres

Drill metres are generated from the blast patterns, or number of holes drilled per face as well as holes drilled for ground support. For example a face with 50 blast holes has 50 drill metres per metre of advance. The number of drill metres determine the explosive and drill consumables cost of the estimate. Drill metres are also used for calculating the operating cost of jumbos and longhole drill rigs.

Labour Cost

The cost of labour resources to undertake a mining activity is the wages to be paid as well as oncosts as a percentage of the wages. These oncosts include payroll taxes, superannuation, long service leave, annual and sick leave, workers compensation, redundancies, and in some instances could include vehicles, accommodation, messing and flights (if not considered as site overhead costs elsewhere). Labour can be classified as either direct labour or overhead labour and is allocated to the mining activity cost by adding both components together.

Direct Labour Cost

Direct labour costs are the cost of labour resources directly related to the mining activity being costed. For example, jumbo operators, truck drivers, loader operators are generally direct labour for development activities as they are a direct cost to development and are only needed if that work activity is required.

Direct labour is allocated at 100% to the mining activity. An estimate is made of the number of mandays per labour occupation required for the mining activity for the length of the costing period. For example, 2 jumbo operators per day (dayshift and nightshift) per jumbo for development activities. Considering pay rates and oncosts the total labour cost is calculated by multiplying the number of mandays by the total manday rate. The total direct labour cost of the occupation is then reduced to a rate per tonne, drill metre, tkm or other unit that is specifically related to the direct labour occupation and mining activity. For example, jumbo operator labour would be a rate per drill metre for development, loader operator a rate per tonne for bogging and truck operator a rate per tkm for haulage.

For each mining activity, the total units (for example tonnes, drill metres, tkm) for the mining operation generally are known as they are derived from the type and quantities of work that are part of the mining schedule or required to be done under the mining contract.

The direct labour cost component of the occupation for a specific mining activity is then calculated by multiplying the rate per unit by the number of units in the activity. For example, the jumbo operator cost per decline metre would be the rate per drill metre x no of drill metres per decline metre of advance. Similarly, the loader operator cost per decline metre will be the rate per tonne x the number of tonnes per decline metre advance.

The total direct labour cost for the mining activity is the sum of all the direct occupations that are required for the activity.

Overhead Labour Cost

The overhead labour costs are the cost of labour allocated to numerous activities as a support role. This includes site management, shift supervisors, service crew and maintenance personnel. These personnel cover many mining activities and are needed immaterial of how much development and production is achieved or required.

When calculating the overhead labour cost component, an estimate is made of the type and number of overhead labour occupations required for the length of the costing period and the subsequent number of mandays. Considering pay rates and oncosts the total labour cost is calculated by multiplying the number of mandays by the total manday rate. This total cost is proportioned over the various mining activities and then each portion allocated as a rate per tonne, drill metre, tkm or other unit of the activity. The portioning is arbitrary and is the estimator’s discretion to decide the percentages to allocate to each mining activity.

By proportioning the overhead labour costs over these units, the overhead labour cost per unit can be multiplied by the number of applicable units of the mining activity or in each schedule of rate contract payment item to arrive at the overhead labour cost component of the item.

For a contractor in a tendering situation, this ensures recovery of the overhead labour cost if the tendered scheduled quantity of payment items is completed in the contract term. If the contractor completes more than the tendered scheduled quantities in the contract term, then he will over recover the costs and make a bigger margin than tendered. Conversely, if he doesn’t complete the quantities then he won’t recover the costs, resulting in a smaller margin. However, if one mining activity is replaced by a similar activity that does not require additional resources then the overhead cost may still be recovered by performing that new activity.

Plant Cost

Plant can be either major or minor and classified as either direct or indirect plant. Direct plant is the plant resources directly related to the mining activity being costed, for example jumbos, trucks, loaders are direct plant for development, stope bogging and haulage and are only need if that work activity is required.

Direct plant resource costs are proportionally allocated to the mining activities that the plant is shared across. Indirect plant is plant that is allocated to numerous activities as a support role such as light vehicles, multipurpose vehicles, compressors etc and is required to support the project immaterial of the amount of development and production achieved. The costs incurred are for common or joint objectives AND cannot be identified readily and specifically with one particular mining activity. The costing component of plant resources is a two-part process consisting of the plant operating cost and the plant fixed or capital cost.

Plant Operating Cost

The plant operating costs are the day to day running costs of the plant item. They include tyres, fuel and oils, GET and repairs and maintenance. These are only cost items that are expended whilst the plant is operating. If an item of plant is stood down, suspended or on standby, ie not actually operating, there will be no operating cost for that time, however an ownership or capital cost will still be applicable.

Plant operating costs used in cost estimates are a cost per operating hour except for jumbos and longhole drill rigs which are a cost per drill metre or per percussion hour. However, some items of plant are better suited to a cost per month (for instance minor/insignificant or rarely used plant). Estimated costs are generally the average hourly/monthy cost over the life of the plant and will be initially overstated but then understated as the plant ages.
Plant operating hours are the engine hours that the item of plant clocks up on the SMU (service meter unit).

In estimating the number of engine hours for the plant operating cost, an allowance for miscellaneous hours of plant operation such as tramming between headings, travelling underground etc must be included.

Mechanical labour in an estimate can be treated as an overhead cost and not allocated to an item of plant, or alternatively included as an estimate of the number of fitter hours required per plant operating hour.

Plant Fixed or Capital Cost

The plant fixed or capital costs are the ownership or holding costs that are incurred whether the item of plant is used or not. This cost is normally calculated as a monthly cost and a contractor in estimating this cost to include in its tender pricing, uses straight line depreciation or the monthly repayments if financed. For example, the capital cost of an item of plant might be depreciated over a period of 36 months giving a cost per month. To this is usually added a hire purchase interest rate per month as most of major plant will be bought on hire purchase or financed. As the depreciation is straight line, the cost per month is the same every month immaterial of the age of the item. However, the older the plant item becomes the operating rate will increase due to more wear and tear.

For contractors tendering purposes, depreciation is used as a mechanism of recognising the decrease in value of the plant item over time as the item is used on the project for the clients benefit. A contractor needs to recover this value to enable future replacement of the plant used. If an item of plant is stood down, suspended or on standby, ie not actually operating, there will still be fixed costs associated with the plant (ownership, holding or financing costs) which will need to be recovered by the contractor if the plant remains on site and is not able to be used elsewhere at another project.

Direct Plant Cost

Direct plant is allocated at 100% to the work activity as a rate per tonne, drill metre, tkm or other unit that is specifically related to the direct plant usage. For example, jumbos would be a rate per drill metre, loaders a rate per tonne and trucks a rate per tkm.

Indirect Plant Cost

Direct plant is allocated at 100% to the work activity as a rate per tonne, drill metre, tkm or other unit that is specifically related to the direct plant usage. For example, jumbos would be a rate per drill metre, loaders a rate per tonne and trucks a rate per tkm.

As overhead plant covers many work activities and is needed immaterial of the development and production produced, its total cost is proportioned over various activities and then each portion allocated on a as a rate per tonne, drill metre, tkm or other unit.
An estimate is made of the quantity and type of indirect plant required for the length of the costing period. The total overhead plant cost for the costing period can then be ascertained, proportioned to activities and then if a contractor, recovered as the activities are performed.

If the contractor has allocated an overhead plant to a particular activity which has a quantity in the schedule of rates and that activity is not performed then there will be no recovery of the cost allocated. However if one activity is replaced by a similar activity that does not require additional resources then the overhead cost will still be recovered. To recover all costs an estimate of the total operating and fixed monthly costs for the whole costing period is ascertained, allowing for miscellaneous hours of plant expended such as tramming between headings, travelling underground etc. These totals are divided by the total tonnes, drill metres etc to come up with a rate per tonne, drill metre and then included in the cost makeup of the appropriate schedule of rate item.

Subcontractor Cost

The cost of any subcontractors is directly allocated to the activity being performed by the subcontractor.

Onsite Overhead Cost

The onsite overheads are the labour and plant costs that are not the direct costs of labour and plant as outlined above. The onsite overheads also include the cost of materials which are not directly and wholly associated to a mining activity or in the case of a contractor, a schedule of rate tender item.

For the contractor, these onsite overhead costs need to be recovered from all the contractor’s revenue generating activities so an allocation of the total onsite overhead cost needs to be included in the rate build ups of items that actually have quantities of work associated with it.

Contractor Fixed and Overhead Cost Spreading and Recovery

The quantum of the amount allocated to each mining activity is highly subjective in that it is related to an amount that the estimator wants to recover utilising this costed item. If too much cost is allocated the rate may be higher than competitors. If not enough cost is allocated the rate may be lower than competitors, which may be beneficial, however if a lot more of that particular work item is done as a replacement for other work then the onsite overheads may not be fully recovered.

The onsite overheads are generated as a cost per unit (tonne, drill metre, tkm or other unit) and then included in the cost makeup of the appropriate schedule of rate item built up from those units.

Offsite or Corporate Overhead Costs

Mine owners and mining contractors have cost items that are not all directly related to the scope of work of the project being costed. These are corporate or head office costs that are costs expended to support the mining activities. They are generally head office administration, head office rental cost, head office supplies, payroll departments, HR departments, supply department and other costs.

In the case of the contractor, these are costs that need to be recovered from all the contractor’s revenue generating activities so an allocation of the corporate costs needs to be included in their rate build ups. This is generally included as a percentage of the total estimated cost of the project and treated as a cost in the same way as other overheads. It is generated as a cost per unit (tonne, drill metre, tkm or other unit) and then included in the cost makeup of the appropriate schedule of rate item built up from those units. The corporate overhead cost will vary between companies as it is related to the size of the company and as to how many revenue generating projects the company has operating to spread the cost over.

Contractor Profit Margin

Like all businesses, contractors desire to make money on the provision of resources that they use on a project for the clients benefit. The margin that they add to their costing is a reflection of both profit requirement, provision for risk and how much they want the work.

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